Michigan's New Offer in Compromise Program

Michigan's new Offer in Compromise (OIC) Program provides taxpayers a solution to their outstanding state tax liability.  It also provides the Michigan Department of Treasury (also known as "the Treasury" or "Treasury") with time saving mechanisms to help collect on an otherwise uncollectable tax liability.  Michigan opted to implement the OIC Program with the passage of Public Act (PA) 240 of 2014¹ and now offers such a program for those who qualify. 

"An "Offer in Compromise Program" provides a codified, uniform and transparent process for taxpayers who cannot pay their taxes to voluntarily come forward with some type of payment and become compliant."²  If a taxpayer has financial hardship, making it difficult to pay their tax liability, a taxpayer is allowed an opportunity to compromise the amount of assessed tax liability through Michigan's new OIC Program.³  Taxpayers are provided the opportunity to submit an offer in compromise if one or more of the following grounds exist: 

1. The taxpayers Federal OIC has been approved by the IRS⁴;
2. A doubt as to collectability exists; or
3. A doubt as to liability exists⁵.   

A doubt as to collectability exists if the amount offered is the most that taxpayer can offer at this time based on the taxpayer's assets and income, and the taxpayer is not going to receive increased income or assets that would enable them to pay a higher offer within a reasonable time period.⁶  A doubt as to liability exists if after reviewing the evidence the Treasury determines that the taxpayer would have prevailed in a contested case for the assessed amount due.⁷ 

If a taxpayer is submitting an offer based on an accepted OIC from the IRS, the taxpayer must submit the offer for the same tax periods and include the letter approving the OIC from the IRS, along with the submission of their Michigan OIC.⁸  The taxpayer's offer may be rejected based on an accepted OIC from the IRS if the tax liability that is assessed in Michigan is substantially different from the federal tax assessment or the taxpayer's circumstances that justified granting the Federal OIC are now materially different.⁹ 

The Treasury is given broad discretion when deciding what offers to accept.  They can put a number of conditions on the OIC.  For example, the Treasury can determine that an offer must be paid in installments and if the taxpayer fails to comply, the Treasury may take action to reinstate the full tax liability.¹⁰ 

Taxpayers who wish to submit an OIC must submit the offer using form 5181.¹¹  They must submit this form along with all accompanying information and a non-refundable initial payment on the offer of $100.00 or 20% of the OIC, whichever is greater.¹²  When a taxpayer submits an offer, all of the following must be true or the offer will be rejected: 

The taxpayer must have been assessed for the tax liabilities specified in the proposed Offer in Compromise. All opportunities for the taxpayer to contest the assessed tax liability in informal conference and appeal the assessed tax liability to the Michigan Tax Tribunal or the Court of Claims must have expired. The taxpayer must have filed returns for all applicable taxes for all outstanding tax years. The taxpayer must have no open bankruptcy proceedings, and form 5181 must be completed fully and signed by all parties who are making the offer.¹³

If the documentation is determined to be incomplete, the Treasury will either reject the offer or allow the taxpayer more time to submit the additional information.¹⁴  The Treasury will allow for a number of payment options but generally the offer must be paid within 24 months, unless a longer time is approved by the Treasury.¹⁵  It is important to note that submission of an offer in compromise does not suspend interest or penalties from accruing on the outstanding tax liability.¹⁶ 

When an OIC is received, the Treasury will provide notice to the taxpayer that their OIC is pending and at that time the taxpayer's property will not be levied for that particular tax debt, unless the Treasury determines that the offer was submitted solely for the purpose of delay, or the Treasury determines that they must issue a jeopardy assessment.¹⁷  Taxpayers may withdraw their OIC at any time, and the Treasury will determine it withdrawn when the taxpayer submits a letter requesting withdrawal.¹⁸  If the taxpayer withdraws the offer, their initial down payment of the offer will not be returned and will be applied to their outstanding tax liability.¹⁹  Once withdrawn, this will no longer stall the Treasury's collection efforts, and the taxpayer's property may be levied at that time. 

If the taxpayer's offer is rejected, this will be communicated to the taxpayer.²⁰  Rejection of the taxpayers offer may be for incomplete information or failure to comply with the requirements to qualify for an OIC.²¹  The Treasury may also reject the offer if they determine that the offer was submitted as a means to stall collection efforts or there is a need for a jeopardy assessment.²²  If rejected, the Treasury will not return the initial down payment and will apply this towards the taxpayers assessed tax liability. 

If rejected, the taxpayer may not appeal the decision, but may request an independent administrative review by filing form 5186 within 30 days after the taxpayer receives the Treasury's rejection letter.²³  Once form 5186 is submitted, then this will suspend collection efforts, unless the offer was submitted as a means to stall collection efforts or there is a need for a jeopardy assessment.²⁴  "An independent administrative review will set aside a rejection of an offer in compromise only upon clear and convincing evidence presented by the taxpayer that the rejection was a result of fraud, adoption of a wrong principle or error of law by [the] Treasury."²⁵

When an OIC is accepted, the taxpayer will be notified of the acceptance.  If the taxpayer complies with the requirements of the OIC, the assessed tax debt for the tax periods specified in the OIC will be forgiven and the lower compromised amount will be accepted in lieu of the full assessment.²⁶  Any OIC that is accepted will be published in a report on the Treasury's website.²⁷  Any tax liens on the property will not be released until the taxpayer complies with the requirements of their OIC.²⁸ 

The Treasury reserves the right to revoke an accepted OIC.²⁹  There may be several reasons for revocation of an OIC which include:  concealing information submitted in the initial offer, destroying or falsifying information, and failure to comply with the terms and conditions of the Offer.³⁰  If the Treasury determines that revocation is warranted they will send the taxpayer a letter revoking the offer and reinstating the initial tax liability.³¹  The initial down payment of the offer and any payments made will not be returned to the taxpayer and will be applied to the taxpayer's total tax liability.³²  There is no deadline for the Treasury to determine to revoke an OIC acceptance.³³

Michigan's new OIC Program makes sense as it favors public policy for several reasons.  The Treasury already spends valuable time and resources attempting to collect from individuals who do not intend on paying their tax liability without an OIC Program.  It brings in uncollectible money from individuals who see an opportunity to pay off their tax liability rather than hide from the Treasury.³⁴  Under Michigan's New OIC Program, taxpayers are voluntarily disclosing their assets as opposed to attempting to hide them from the Treasury.³⁵  Taxpayers who qualify, save the Treasury time and resources that they would normally have spent attempting to collect these tax debts through other avenues.³⁶  Without an OIC Program, a taxpayer has no reason to make payments because payment towards an assessed tax liability revives the Statue of Limitations for collection of the assessed tax liability.³⁷ 

The passage of this program is so beneficial to the Treasury, and there should be an immediate increase in collection as many taxpayers who would not normally come forward will submit OIC's which will be accepted.  Those taxpayers who do not qualify will more than likely pursue an installment agreement.³⁸  Time is such a beneficial asset to the Treasury as they will now be able to accept the taxpayers offer, propose another offer, or advocate that the taxpayer be put into an installment agreement.  Although time and resources will be spent reviewing these offers, the benefits truly outweigh the costs as this will take pressure off of other collection efforts as more taxpayers will voluntarily come forward.  Further, taxpayers come into compliance through an OIC are more likely to stay compliant in the future as they will be thankful for the assistance and since their offer can be revoked for failure to file subsequent returns.³⁹ 

¹ See Guidelines for Michigan Offer in Compromise Program available at_ http://www.michigan.gov/documents/taxes/Guidelines_for_Offer_in_Compromise_Program_487610_7.pdf; See also http://www.michamber.com/files/michamber.com/Offer%20compromise%20Background%20(2)_0.pdf.
² See http://www.michamber.com/files/michamber.com/Offer%20compromise%20Background%20(2)_0.pdf. 
³ See Guidelines for Offer in Compromise available at_ http://www.michigan.gov/documents/taxes/Guidelines_for_Offer_in_Compromise_Program_487610_7.pdf
⁴ Id. "Treasury may accept a taxpayer's offer in compromise on this basis if the taxpayer has otherwise satisfied all of the conditions necessary to submit an offer in compromise under section 23a of the Revenue Act, MCL 205.23a, which are the following: a. The taxpayer is not in bankruptcy; b. The taxpayer paid the required payment of $100.00 or 20% of the offer, whichever is greater; c. The tax liability included in the offer in compromise has been assessed by Treasury. d. The taxpayer's opportunity to contest the tax liability in Treasury's informal conference process and to appeal the assessed tax liability to the Michigan Tax Tribunal or a court has expired; e. The taxpayer has submitted all required returns for outstanding tax periods, and is otherwise compliant with the state's tax filing requirements; and f. The reasons or circumstances for being granted the federal Offer in Compromise for the tax years continue to exist at the time the taxpayer submits its offer in compromise."
⁵ Id. "[In a doubt as to liability offer] A taxpayer must demonstrate by clear and convincing evidence that the taxpayer would have prevailed in a contested case. In other words, a taxpayer must demonstrate that it is substantially more likely than not that the taxpayer is not liable for all or a portion of the tax liability.   A doubt as to liability does not exist where the liability for the tax debt has been established by a final decision or judgment of the Michigan Tax Tribunal or a court."
⁶ Id.
⁷ Id.
⁸ Id. "The availability of an offer in compromise based on the grant of a federal Offer in Compromise is limited to tax liabilities for the individual income tax under MCL 206.1 et and the corporate income tax under MCL 206.601 et seq."
⁹ Id. 
¹⁰ Id.
¹¹ Id.
¹² Id. The treasury will apply this amount to the OIC if accepted and if rejected or revoked will be applied towards the taxpayers total assessed tax liability.
¹³ Id. See also Frequently asked questions available at:  http://www.michigan.gov/documents/taxes/FAQs_for_OIC__121514_for_website_476833_7.pdf.
¹⁴ Id. 
¹⁵ See Guidelines for Offer in Compromise available at_ http://www.michigan.gov/documents/taxes/Guidelines_for_Offer_in_Compromise_Program_487610_7.pdf
¹⁶ Id. 
¹⁷ Id. "A determination that an offer in compromise is submitted solely for the purpose of delaying collection is appropriate in the following circumstances: a. A taxpayer submits an offer in compromise that is not materially different from a previous offer that was rejected; b. A taxpayer submits an offer in compromise within a short period of time after defaulting on an accepted offer in compromise; or c. A taxpayer's presentation and position in support of its claim as to doubt as to liability is clearly frivolous because it is plainly unsupported by facts or law." "An offer in compromise based on doubt as to collectability is presumed to be submitted solely for the purpose of delaying collection in the following circumstances: a. A taxpayer submits an offer in compromise that is not materially different from a previous offer in compromise that was rejected, and there are no material differences in the taxpayer's financial situation from that which existed in the previous offer in compromise; b. A taxpayer submits an offer in compromise within a short period of time after defaulting on an accepted offer in compromise and the taxpayer's financial situation has not materially changed since the offer in compromise was accepted; or c. The taxpayer had been contacted by Treasury collection personnel and informed that Treasury would begin collection of the tax debt through levy or seizure, and the taxpayer's offer in compromise is clearly frivolous because it is significantly less than the taxpayer's net worth or household resources, and/or significantly less than the taxpayer's ability to make future payments."
¹⁸ Id. 
¹⁹ Id. 
²⁰ Id. If the Treasury rejects an OIC based on doubt as to collectability, they may indicate in their rejection letter another proposed offer that the taxpayer may accept or reject.  The letter will include the reasons why the Treasury's analysis supports this offer. Responses are due within 20 days from the date of the letter and failure to respond constitutes rejection of the offer.
²¹ Id. See Supra note 13.
²² Id. 
²³ Id. 
²⁴ Id. 
²⁵ Id. "Questions of law will be reviewed de novo." "A decision of the independent administrative review is final and may not be appealed to the Michigan Tax Tribunal or to any court." 
²⁶ Id. 
²⁷ Id. "The report will contain, at a minimum: a. the amount of tax assessed; b. the amount of interest or assessable penalty imposed by law; c. the terms of the compromise and the amount actually paid under the terms of the compromise; and d. the grounds for the compromise."
²⁸ See Frequently asked questions available at:  http://www.michigan.gov/documents/taxes/FAQs_for_OIC__121514_for_website_476833_7.pdf.
²⁹ See Guidelines for Offer in Compromise available at_ http://www.michigan.gov/documents/taxes/Guidelines_for_Offer_in_Compromise_Program_487610_7.pdf
³⁰ Id. 
³¹ Id. "[The] Treasury's letter will provide the following: a. A statement of the reasons for the revocation, including any determined deficiencies; b. A statement of the amount of the tax debt that is reinstated; c. A statement of the amount of payments previously made by the taxpayer under the offer in compromise that are credited against the reinstated tax debt; d. A statement of the amount of the remaining balance of the tax debt, including any applicable penalties and interest due; e. In the case of 1.c., above, a statement that the taxpayer's failure to comply with the conditions of the accepted offer in compromise or to file required returns or pay tax liabilities after the offer in compromise is accepted within 20 days after Treasury's notice and demand may result in revocation; and f. A statement of the opportunity for independent administrative review of the revocation."
³² Id. 
³³ Id. 
³⁴ See http://www.michamber.com/files/michamber.com/Offer%20compromise%20Background%20(2)_0.pdf.
³⁵ Id. 
³⁶ Id. 
³⁷ Id. 
³⁸ Id. 
³⁹ See Form 5181 available at_ https://www.michigan.gov/documents/taxes/5181_OIC_476786_7.pdf.